ABC analysis: which goods bring in most of the revenue, and what should be done about it?
Four out of ten product groups bring in three quarters of revenue. Using a minimarket as an example, we carry out an ABC analysis step by step and compare the result with profit.
Dilfuza, the owner of the "Bahor" minimarket, spent the same amount of time on every product: she tracked each one's price, ordered each one and counted each one. Lots of fatigue, and the profit stayed the same. Her daughter Madina, an accountant, showed her mother a simple statistical method: ABC analysis.
What is the idea?
In many businesses, a small number of goods bring in a large part of revenue. This is often called the "80/20 rule". It is not a law, it is an observation: the ratio comes out differently in every shop. ABC analysis finds the actual ratio in your own shop and divides the goods into three groups.
Five steps
- Write down the revenue for the period for each product group.
- Sort them from largest to smallest.
- Calculate each one's share of total revenue.
- Add the shares one after another to find the cumulative share.
- Apply the thresholds. A commonly used convention: cumulative share up to 80% is A, 80–95% is B, the rest is C. You can choose the thresholds yourself; what matters is that they are the same every time.
The "Bahor" minimarket: quarterly results
Revenue in mln soum, hypothetical. The total is 100 mln soum, so the amount and the share are the same number.
| No. | Product group | Revenue | Share | Cumulative share | Group |
|---|---|---|---|---|---|
| 1 | Flour and cereals | 35 | 35% | 35% | A |
| 2 | Vegetable oil | 20 | 20% | 55% | A |
| 3 | Tea and coffee | 12 | 12% | 67% | A |
| 4 | Sweets | 9 | 9% | 76% | A |
| 5 | Dairy products | 7 | 7% | 83% | B |
| 6 | Drinks | 6 | 6% | 89% | B |
| 7 | Canned goods | 4 | 4% | 93% | B |
| 8 | Household chemicals | 3 | 3% | 96% | C |
| 9 | Spices | 2 | 2% | 98% | C |
| 10 | Disposable tableware | 2 | 2% | 100% | C |
The result at a glance
| Group | Number of product groups | Share of groups | Share of revenue |
|---|---|---|---|
| A | 4 | 40% | 76% |
| B | 3 | 30% | 17% |
| C | 3 | 30% | 7% |
| Total | 10 | 100% | 100% |
Four of the ten groups bring in more than three quarters of revenue. Dilfuza should spend her time on these first.
Check by profit too, not just revenue
A product with high revenue is not always the most profitable. Madina also calculated the gross profit of two groups (hypothetical):
| Product group | Revenue | Gross profit | Gross profit as a share of revenue |
|---|---|---|---|
| Flour and cereals | 35 | 2.8 | 8% |
| Tea and coffee | 12 | 3.6 | 30% |
By revenue, flour is in first place. By profit, however, tea and coffee are ahead of it: 3.6 mln > 2.8 mln. That is why you should do the ABC analysis twice: by revenue and by gross profit. A product that is A in both is the shop's "golden" item.
What is done with the groups?
| Group | Stock | Price and supplier | Counting |
|---|---|---|---|
| A | Must never run out, the balance is monitored daily | Prices are compared regularly, an alternative supplier is kept ready | Frequent, selective counts |
| B | Normal ordering procedure | Reviewed once a quarter | In the regular stocktaking |
| C | Small quantities, when needed | Only when there is a big change | In the regular stocktaking |
Be careful: group C does not mean "unnecessary". Spices bring in 2% of revenue, but customers buy them together with flour and oil. If you remove them, a customer may go to the shop next door and make their group A purchases there too.
Practical tips
- Repeat the analysis every quarter: when the season changes, goods move from group to group.
- Compare like periods (quarter with quarter), otherwise holiday months will distort the result.
- Start with logical product groups, not with very small items.
- Link the result to the ordering and stocktaking plan, so that the analysis does not stay on paper.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
A tea shop calculated the linear correlation coefficient between advertising spending and weekly sales: r = 0.9. What share of the variation in sales does the coefficient of determination (r²) explain as linked to advertising?
For a confectionery workshop's sales: the price index is 108% and the physical volume (quantity) index of products sold is 125%. What is the sales value (revenue) index?
Monthly revenue of four branches: 12, 7, 19 and 14 mln soums. What is the range of variation (the difference between the largest and smallest values)?
A barbershop planned revenue of 80 mln soums for the month and actually earned 92 mln soums. What is the relative indicator of plan fulfillment?
A bakery's revenue grew from 100 mln soums to 144 mln soums over two years. What is the average annual growth rate (by the geometric mean method)?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- Example, amounts and calculations · compiled by the author, hypothetical
- Group thresholds (80% and 95%) · a convention widely used in practice; not a requirement of law or a standard